Community Banks and Loans for Nonmetropolitan Businesses: A Multilevel Analysis from the 2007 Survey of Business Owners

Abstract

Access to financial capital is vital for the sustainability of the local business sector in nonmetropolitan communities. In this article we develop two hypotheses and examine the impact of financial sector restructuring on the odds of using a bank loan to finance a new business or expand an existing business. Focusing on nonmetropolitan American businesses, we connect restricted tabulations of the 2007 Survey of Business Owners to data on the commuting zones (CZ) in which businesses are located. We use multilevel logistic regression models to predict the effects of community bank presence within the CZ on the odds of using a bank business loan to start or expand a business for nonmetropolitan businesses started or purchased since 2000. Net of important characteristics of the businesses and owners, we find that the greater the proportion of local banks in a nonmetropolitan CZ, the greater the odds that a conventional business loan was used to either help start a new business or expand an existing business.

Self-employment and Civic Inclination

“…It is in their best financial interest to be engaged in the community. The civic community perspective offers that the self-employed are more civically oriented because they (typically) operate small businesses in markets that are bound to place by their symbiotic relationships with their customers, suppliers, employees, and credit sources (see Lyson 2004; Mencken and Tolbert 2018; Rotolo and Wilson 2006). The self-employed rely upon their community reputation (honesty, trustworthy) and word-of-mouth references for new and repeat customers.…”

“…Fourth, the self-employed are more likely to have network-dependent financing sources (Black and Strahan 2002; Burns 2011; Craig et al 2007; Mencken and Tolbert 2016, 2018). Historically, local businesses and community banks formed symbiotic relationships.…”

“…It has become commonplace for policymakers to embrace the David L. Birch (1987) Hypothesis that small businesses create the majority of jobs. 12 One roadblock to this development strategy has been the loss of locally owned community banks who were willing to lend on the reputation of the borrower (DeYoung, Hunter, and Udell 2002; Mencken and Tolbert 2018; Tolbert et al 2014). This has the potential to slow entrepreneurship and to decrease the levels of community capital.…”

Locally Owned Bank Concentration and Business Start-Ups and Closures in U.S. Metropolitan, Micropolitan, and Rural Counties from 1980-2010

“…They compare the lending patterns of banks consolidated into absentee firms and those consolidated into local community banks and find that small business loan growth flourished in the late 1990s among the latter and stagnated among the former. In an analysis of the 2000-2007 time frame, Mencken and Tolbert (2018) find that the concentration of locallyowned banks in a local economy increased significantly the odds that a business was started and/or expanded during that time frame with a conventional bank loan. Moreover, they find that this effect is significantly stronger in non-metropolitan economies (Mencken and Tolbert, 2018).…”

“…The patterns of mergers and acquisitions in the U.S. financial sector since the 1980s have led some scholars to be concerned about disadvantages for businesses that attempt to start and/or operate in rural locations (see Tolbert et al, 2014;Flora et al, 2015;Mencken and Tolbert, 2018). Historically, local banks and local businesses formed symbiotic relationships, which often included practices of 'relationship' lending.…”